January 26, 2022

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Meaning of Fund of Funds in a VC key Explanations

Meaning of Fund of Funds in a VC key Explanations
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There are various fund of funds (FOFs) you should know. However, this article focuses on venture capital and private equity FOFs. Here, a VC firm sourced for funds and invested the fund in other VCs. Let’s explain this term in detail below.

Definition of Fund of Funds in VC

Fund of Funds is a special type of venture capital firm that pools funds from various sources and make them available to other VCs that invest in private equity companies.

Key Explanations of FOFs

A VC fund of funds seeks funds from high net worth individuals and institutions. These funds may not be easy for regular or small venture capital to acquire. FOFs activities are similar to normal VCs. They earned income from management fees and carriage interest. But their earnings are smaller compared to the regular VC.

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One reason is the huge expense ratio attached to it. These venture capitalists have a high operating cost. Management fees are usually high due to the nature of the business. It has to incur these fees by investing in other VCs.

FOFs diversify their portfolio by investing in different categories of VC such as early, late and multistage. Such diversity reduces its risk but also reduces returns to investors.

Fund of funds operates like a normal VC. As a limited partner, they source investment from their general partners. They also have senior and junior partners of the venture capital. In addition, they earn management fees and carriage interest like every other private equity fund.

Most VC FOFs are unfettered funds. This means they invest in several small VC firms. However, a fettered fund invests in one VC firm. FOF does not apply only to private equity funds. There are also mutual fund FOFs and hedge fund FOFs.

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Conclusion

Fund of Funds venture capital pooled investment funds from its general partners and made them available to other VCs. By diversifying their fund they reduced risk. But as you know, the lower the risk the lower the return. Also, their operating costs are higher than regular VCs.

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